Serviceable Obtainable Market
Also written SOM · Serviceable Obtainable Market (SOM) · Serviceable obtainable market share
The share of the Serviceable Available Market a company can actually capture in the long run with a sustainable marketing approach — and the number a venture-stage valuation is built on.
In plain language
SOM is the only one of the three market numbers that has a competitor in it.
TAM says how much demand exists. SAM says how much of it this company is built to serve. SOM says how much of that the company will actually win, over the long run, spending what it can sustainably afford to spend on winning it.
The workbook is blunt about why this matters more than the other two: valuation of an investee company at the venture stage depends on a high value of the SOM. TAM gets the meeting. SAM gets the diligence. SOM gets the cheque, and sets its size.
How it works
The phrase the workbook uses is "with a sustainable marketing approach", and it is doing real work. A company can buy almost any market share for a while. What it cannot do is buy share faster than its unit economics allow and survive — which is why SOM and the customer metrics are read together.
A SOM claim is therefore only as good as the arithmetic underneath it:
- Customer Acquisition Cost — what it costs to win one customer, which venture investors treat cautiously because a high CAC hampers long-term growth and sustainability
- Customer Lifetime Value — what that customer is worth once won
- The CLTV/CAC ratio — whether the spend to reach SOM is sustainable at all
- Churn — because share captured and then lost never reaches SOM
That is the loop: a big SOM justifies a big valuation; a big SOM requires spend; the spend is only sustainable if CLTV comfortably exceeds CAC. A deck that shows a large SOM and a CLTV/CAC ratio near 1 has not shown a large SOM.
A worked example
The diagnostics software start-up again. TAM Rs 720 crore, SAM Rs 88 crore.
The founders claim SOM of 25 per cent of SAM — Rs 22 crore of annual revenue in five years. The fund tests it against the spending it implies:
| Input | Figure |
|---|---|
| Average annual contract value | Rs 1.14 lakh |
| Customers needed for Rs 22 crore | about 1,930 |
| Customers today | 240 |
| Customers to be won in 5 years | about 1,690 |
| Customer Acquisition Cost | Rs 48,000 |
| Total acquisition spend implied | about Rs 8.1 crore |
Against a Customer Lifetime Value of Rs 2.9 lakh, the CLTV/CAC ratio is 6x, and Rs 8.1 crore of acquisition spend against Rs 22 crore of annual recurring revenue at the end of it is sustainable. The SOM survives.
Now re-run it with CAC at Rs 1.6 lakh, which is where it sits if the company has to buy customers away from the four funded competitors rather than sign up new ones. Acquisition spend becomes Rs 27 crore — more than the annual revenue it produces — and the CLTV/CAC ratio falls to 1.8x. The same 25 per cent share is no longer obtainable on a sustainable marketing approach, and the fund reprices the round accordingly.
The market did not change. The SOM did.
Why NISM asks about it
Chapter 9, section 9.1.2, under Venture Capital Investments. Two things are examinable: that SOM is the percentage of SAM capturable in the long run with a sustainable marketing approach, and the link the workbook draws explicitly — that the venture-stage valuation depends on a high SOM.
Common exam traps
- SOM is a percentage of SAM, not of TAM. Applying the capture rate to TAM is the most common way to inflate a market-size slide by an order of magnitude.
- It is a long-run figure, not next year's sales target.
- "Sustainable" is part of the definition. Share bought at a CAC the business cannot carry is not SOM.
- The workbook ties valuation to SOM specifically — not to TAM. A question asking which measure drives venture-stage valuation is answered SOM.
- SOM is the first of the three measures where competitors matter. TAM treats their presence as validation; SOM treats them as a constraint on share.
- Rising churn silently destroys SOM even while gross customer additions look healthy.
Check yourself
1.Why do venture capital investors regard the presence of competitors in an investee company's market as a positive signal?
- a)Because competitors can be acquired later at a discount
- b)Because it validates a high Total Addressable Market for the investor
- c)Because SEBI requires at least three comparable companies before a valuation can be certified
- d)Because competition lowers the Customer Acquisition Cost for all players
Show the answer
Answer: (b) Because it validates a high Total Addressable Market for the investor
Presence of competition is a good sign for investors as it proves a validation of a high Total Addressable Market. If the market size is big and demand for the company's offerings is growing, investors will show keen interest and focus their research on the ability of the founding team to execute the business model.
An entrepreneur claiming "we have no competition" is usually saying one of two things: he has not looked properly, or nobody wants this.
The analysis then narrows through two further metrics: SAM (Serviceable Available Market) measures how much of the TAM can realistically be achieved by this company given its business model and revenue targets; and SOM (Serviceable Obtainable Market) is the percentage of SAM capturable in the long run with a sustainable marketing approach. Valuation at this stage depends on a high value of the SOM.
Competition does not lower CAC - it usually raises it, which is why VCs watch CAC so closely.
2.Which of the following is NOT one of the benefits of venture debt to the provider, as listed in the workbook?
- a)It has a contractual maturity date with a shorter duration such as 2 to 3 years, compared with venture capital
- b)It often has shares or other collateral
- c)It is senior to the equity in the capital structure
- d)It carries lower risk than normal bank debt because the collateral is readily saleable
Show the answer
Answer: (d) It carries lower risk than normal bank debt because the collateral is readily saleable
The workbook lists exactly three benefits: (a) a contractual maturity date with a shorter duration such as 2-3 years compared with venture capital, (b) it often has shares or other collateral, and (c) it is senior to the equity in the capital structure.
Option 4 reverses the position. Venture debt comes in at a higher risk level than normal bank debt and even private credit in established companies. The risk is mainly the insufficiency or negative cash flow of the debtor companies at that stage.
And the collateral is precisely the weak point: should the company's fortunes turn for the worse, the lending AIF would be left with some founder shares in the distressed company which are available as collateral. Since such shares are not traded, the loans can become sticky. Collateral that cannot be sold is not much collateral.
The compensation for that risk is the equity kicker - a right to convert part of the loan at an agreed valuation, which becomes an in-the-money option if valuation rises - and potential IRRs of over 25 to 30 per cent.
3.Which statement about the relationship between savers and investors is correct according to the workbook?
- a)Every investor is a saver but not vice versa
- b)Every saver is an investor but not vice versa
- c)Savers and investors are the same thing
- d)Neither group necessarily overlaps with the other
Show the answer
Answer: (a) Every investor is a saver but not vice versa
The workbook states that those who save funds have the choice of investing. Hence, EVERY INVESTOR IS A SAVER BUT NOT VICE VERSA.
Saving is just the difference between money earned and money spent. Investment is the current commitment of savings with an expectation of receiving a higher amount of committed savings, and it involves some specific time period — it is the process of making the savings work.
Saving is therefore the necessary first step, and investment is one of the things that may be done with the result.
Where this is taught
Free preparation for NISM Series XIX-DRelated terms
- Customer Acquisition CostThe average cost of winning one new customer — read against customer lifetime value, it says whether a start-up is buying revenue at a profit or at a loss.
- CLTV/CAC ratioCustomer Lifetime Value divided by Customer Acquisition Cost — how many rupees of customer revenue a start-up buys for every rupee it spends winning that customer.
- Customer Lifetime ValueThe total revenue a start-up earns from one customer across the whole relationship — average purchase value multiplied by the average number of purchases that customer makes.
- Serviceable Available MarketThe slice of the Total Addressable Market a company can realistically reach given its own business model and revenue targets — the market it is actually built to serve.
- Total Addressable MarketThe whole revenue opportunity that exists for a product if every possible buyer bought it — the outermost of the three market-size numbers a venture investor tests a start-up against.